Oil In 2013: New Era For Global Markets As U.S. Marches Toward Energy Independence

Agustino Fontevecchia
, ContributorFrom global billionaires to art market fraud, I cover power and moneyOpinions expressed by Forbes Contributors are their own.

After a decade of tight energy markets and rising commodity prices, the global economy is entering a new era marked by rising oil production at high prices. Yet, the prospects of U.S. energy independence, on the back of the “shale revolution,” a move toward cleaner energy, and slowing growth across the emerging world suggest longer-term oil prices should trend downwards. Going into 2013, crude oil will remain range-bound, with the potential to fall on sub-par global GDP growth and the prospects of positive supply shocks. Goldman Sachs sees Brent averaging $110 next year while Raymond James’ chief economist suggests U.S.-benchmark WTI could fall as low as the mid-$60s.

“We see an easing of oil prices [in 2013] as demand remains weak,” explained Peter Kiernan, lead energy analyst for the Economist Intelligence Unit, adding that even fast-growing emerging markets and non-OECD nations will experience a poor economic performance next year. “[Still], the generally secular trend of new finds becoming more expensive to extract” could keep a floor under prices, Kiernan said.

Indeed, Brent, the international benchmark, has remained resilient despite a U.S. economy that has barely muddled through, a sovereign debt crisis in Europe, and a marked slowdown in Chinese output, and therefore demand. With the exception of a short-lived mid-year plunge, Brent remained above $100 a barrel for most of the year, hitting a high of $128.40 in early-March.

Goldman Sachs’ economics research team expects Brent to average $110 next year even as supply constraints ease across the globe. With global GDP growth at 3.3% (well below the potential 4.2% estimated by Goldman), crude should trend lower through 2013, ending the year around $105 per barrel. Markets will remain tight, with curves “backwardated” (meaning short-term prices exceed long-term ones), but will progressively ease as capacity to bring more supply at current prices increases.

The supply issue will be key going forward. Brent’s resilience can be attributed to low spare-capacity among OPEC nations, in part due to Saudi Arabia’s increased pumping(which eats into spare-capacity), and a risk-premium attributed to possible Middle East conflict, particularly between Israel and Iran, Kiernan noted.

A “shale revolution” in the U.S. promises to change the market landscape. “U.S. production of shale gas has exploded with a nearly 50% annual increase between 2007 and 2011,” a report by the National Intelligence Council noted, while shale oil production, still in its infancy, could bring anywhere from 5 to 15 million barrels per day by 2020 at a break-even price as low as $44 to $68 per barrel. “By 2020, the U.S. could emerge as a major energy exporter,” the report added.

RBC Capital Markets’ commodities expert, George Gero, agrees. Gero sees WTI trading in a $20-band around the mid-$80s in 2013, adding that excess supply at Cushing, Oklahoma, where WTI is priced, are a result of a lack of transportation and refining infrastructure, along with weak demand. These supplies, coupled with a weaker dollar courtesy of Ben Bernanke and his quantitative easing, should help U.S. energy export growth.

Rising U.S. production, along with easing Asian demand, specifically from China, should ensure the substantial spread between Brent and WTI will continue next year, both Gero and EIU’s Kiernan suggest. This spread will narrow in the medium-term, as the Keystone XL pipeline comes to fruition and infrastructure in the area develops further, allowing WTI to approach the global benchmark.

Crude oil, being a global commodity with production in many cases concentrated in volatile regions of the world, is always prone to major swings on geopolitical events, particularly violence in the Middle East. But, if crude is set to remain range-bound, investment opportunities still exist. Companies that assist production like Schlumberger and Halliburton should benefit from increased drilling, while remaining relatively protected from price fluctuations. Refiners, such as Phillips 66 and Valero, should gain as infrastructure in the U.S. develops. Finally, major integrated names like Chevron and Exxon Mobil will have to walk the tight rope between difficult upstream and favorable downstream environments.

The world is tip-toeing into a new era for energy. Slower global growth means demand will remain tempered, yet higher extraction costs, and the constant possibility of a violent flare-up in the Middle East, should keep a floor under prices. With the U.S. slowly but surely taking a lead role as an exporter, rather than a major importer, and China cooling, longer-term oil prices should begin to trend downward. In the mean-time, expect volatility and range-bound markets.